|
|
| Acid
Test (Quick Ratio) |
= |
(Cash
+ Accounts Receivable + Short-term Investments) |
|
Current
Liabilities |
|
A
stringent test that indicates if a firm has enough short-term assets
(without selling inventory) to cover its immediate liabilities. It is
similar but a more strenuous version of the "working capital"
ratio, indicating whether liabilities could be paid without selling
inventory.
Things
to remember |
- An
extreme version of the working capital ratio because it
only uses cash and equivalents.
- The
ratio excludes inventory, which for some companies can
make up a large portion of its assets.
|
[Click
on the image(s) above to see the financial statements] |
For
Cory's Tequila Co. |
$827+$1189+$1242 |
=
1.08 |
$3,003 |
|
Acid
Test Analysis:
This ratio is used to determine risk that is not detected by the
Working Capital ratio. Cory's Tequila Co. seems to be all right
in this area. Their ratio of 1.08 means that they have just enough
liquid assets to cover a unexpected drawdown of liabilities (people
wanting their money now). Companies with ratios of less than 1 can
not pay their current
liabilities and should be looked at with extreme care. Furthermore
if the acid ratio is much lower than the working capital ratio it
means that current assets are highly dependent on inventory - retail
stores are examples of this type of business.
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